Amy Gehrt: Time to end tax-dodge shadiness

Friday

Jul 25, 2014 at 1:28 PMJul 25, 2014 at 1:28 PM

By Amy GehrtMore Content Now

A growing number of American companies are moving overseas ... on paper, at least.The tactic is called a corporate inversion, but for those who have no idea what that means, perhaps a more apt description would be “shady tax dodge.”Here’s how it works: A U.S. company combines — through a merger or an acquisition — with a foreign business whose shareholders own at least 20 percent of the new entity. Often, the American business maintains control of the company and its corporate headquarters, but it shifts its U.S. tax domicile to the foreign business and, voila, lower taxes. Yes, yes, I know it’s legal. As with many of these loopholes, however, the question is should it be? To me, the answer is a resounding no. If allowed to continue unabated, over the next decade the practice could cost the U.S. Treasury $17 billion in lost revenue, according to government estimates.During a public appearance at a technical college in Los Angeles Thursday, President Barack Obama accused these companies of “cherry-picking the rules.”“They’re technically renouncing their U.S. citizenship. They’re declaring they are based someplace else, even though most of their operations are here,” he said. “You know, some people are calling these companies corporate deserters.”Strong words, but in this case they ring true. After all, these corporations happily take advantage of all of the benefits that come with being an American company. Many often proudly proclaim themselves patriotic. Yet when it comes time to pay Uncle Sam, they balk.The Congressional Research Service reports that 47 U.S.-based companies have taken advantage of the corporate inversion loophole in the past decade. Nine of those deals were struck in the last year, and others are in the works.One of those considering a corporate inversion is Walgreen Co. The Deerfield, Illinois, drug-store chain that bills itself as “America’s premier pharmacy.” Yet if it follows through on plans to purchase a 55 percent stake in Swiss-based retailer and wholesaler Alliance Boots (it acquired the other 45 percent in 2012), it “could dodge an estimated nearly $4 billion in taxes over the next 5 years,” according to a letter Senate Majority Whip Dick Durbin, D-Ill., sent to Walgreen President and CEO Gregory Wasson, urging him and the board of directors (all of whom were CCed on the letter) to reconsider. In the text, which was included in a press release I received Tuesday, Durbin writes, “I recognize that potential windfall in profit is an attractive option for shareholders. On the other hand, much of Walgreens financial success was built on programs and infrastructure provided by the U.S. government and paid for by U.S. taxpayers. The future success of Walgreens will continue to depend on U.S. taxpayers and government-funded programs, yet Walgreens will be using a clever tax dodge to avoid paying $4 billion in U.S. Taxes.”Durbin also points out that nearly all of the chain’s $2.5 billion in profits came from sales to Americans — and 25 percent were purchases made through the Medicare and Medicaid programs, both of which are funded by the U.S. Government.“I believe you will find that your customers are deeply patriotic and will not support Walgreen’s decision to turn its back on the United States,” the second-ranking Democratic leader wrote.He’s got a point. Actions speak louder than words, and all of the flag-waving and “American” proclamations in the world won’t disguise the sheer hypocrisy of a company taking all that it can from a country and its citizens while shipping its profits overseas in order to give as little as possible to the public coffers.American citizens don’t get to choose the tax rate they pay, and U.S. companies shouldn’t be able to do so, either.In his 2015 budget Obama proposed raising the inversions threshold by 30 percent, meaning a foreign company’s shareholders would need to own at least 50 percent of the newly merged entity in order for a corporate inversion to be permissible. The president also wants to make that retroactive to May in order to avoid a rush of last-minute deals.The fight has begun on Capitol Hill, but it’s already meeting with resistance, with some saying closing the loophole must be part of a comprehensive tax code reform package.No one’s arguing that our tax code system isn’t flawed. However, hashing out an agreement on a complete overhaul that will get enough support in Congress to pass both the House and the Senate will take time — particularly given the current crop of lawmakers, many of whom seem to believe obstructing progress is better than actually legislating.Given how many billions are at stake with corporate inversions, we simply can’t afford to leave this loophole open while we wait.—— Amy Gehrt is the city editor of the Pekin (Illinois) Daily Times. She may be reached at agehrt@pekintimes.com, or on Twitter @AmyGehrt. The views expressed in this column are not necessarily those of the Pekin Daily Times or this publication.